Sesi 11 Joint Cost

8/2/2019 Sesi 11 Joint Cost

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Joint Costing

A Lecture Presentation

by

School of AccountingPadjadjaran State University


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Learning Objective 1

Identify the splitoff point(s)

in a joint-cost situation.


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Joint-Cost Basics

Joint productsJoint costs

Separable costs

Splitoff pointByProduct

MainProduct


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Joint-Cost Basics

Raw milk

Cream Liquid Skim


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Joint-Cost Basics

Coal

Gas Benzyl Tar


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Distinguish joint products

from byproducts.


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Joint Products and Byproducts

Sales Value

HighLow

Main Products

Joint ProductsByproducts


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Explain why joint costs should be

allocated to individual products.


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Why Allocate Joint Costs?

to compute inventory cost and cost of goods sold

to determine cost reimbursement under contracts

for insurance settlement computations

for rate regulation

for litigation purposes


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Allocate joint costs using

four different methods.


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Approaches to AllocatingJoint Costs

Approach 2:

Physical measure

Approach 1:

Market based

Two basic ways to allocate

joint costs to products are:


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Approach 1: Market-based Data

Sales value at splitoff method

Estimated net realizable value (NRV) method

Constant gross-margin percentage NRV method


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Allocating Joint Costs Example

10,000 units of A at a

selling price of $10 = $100,000

10,500 units of B at a


11,500 units of C at a


Joint processingcost is $200,000

Splitoff point


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Allocating Joint Costs Example

A B C Total

Sales Value $100,000 $315,000 $230,000 $645,000

Allocation of

Joint Cost

100 645 31,008

315 645 97,674230 645 71,318

200,000

Gross margin $ 68,992 $217,326 $158,682 $445,000


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Sales Value at SplitoffMethod Example

Assume all of the units produced

of B and C were sold.2,500 units of A (25%)

remain in inventory.

What is the gross marginpercentage of each product?


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Product A Revenues: 7,500 units $10.00 $75,000

Cost of goods sold:Joint product costs $31,008

Less ending inventory

$31,008 25% 7,752 23,256Gross margin $51,744


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Product A:

($75,000

$ 23,256) $75,000 = 69%Product B:

($315,000 $97,674) $315,000 = 69%

Product C:($230,000 $71,318) $230,000 = 69%


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Estimated Net Realizable Value(NRV) Method Example

Assume that Oklahoma Company can process

products A, B, and, C further into A1, B1, and C1.The new sales values after further processing are:

A1:10,000 $12.00

= $120,000

B1:10,500 $33.00

= $346,500

C1:11,500 $21.00

= $241,500


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Additional processing (separable) costs are as follows:

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of eachproduct at the splitoff point?


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Product A1: $120,000 $35,000 = $85,000

Product B1: $346,500 $46,500 = $300,000

Product C1: $241,500 $51,500 = $190,000

How much of the joint cost is allocated

to each product?


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To A1:

85 575 $200,000 = $29,565To B1:

300 575 $200,000 = $104,348

To C1:190 575 $200,000 = $66,087


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Allocated Separable Inventory

joint costs costs costsA1 $ 29,565 $ 35,000 $ 64,565

B1 104,348 46,500 150,848

C1 66,087 51,500 117,587

Total $200,000 $133,000 $333,000


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Constant Gross-MarginPercentage NRV Method

This method entails three steps:

Step 1:

Compute the overall gross-margin percentage.

Step 2:

Use the overall gross-margin percentage

and deduct the gross margin from the

final sales values to obtain the total

costs that each product should bear.


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Step 3:

Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.


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What is the expected final sales value of total

production during the accounting period?Product A1: $120,000

Product B1: 346,500

Product C1: 241,500Total $708,000


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Step 1:

Compute the overall gross-margin percentage.Expected final sales value $708,000

Deduct joint and separable costs 333,000

Gross margin $375,000Gross margin percentage:

$375,000 $708,000 = 52.966%

C G i


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Step 2:

Deduct the gross margin.

Sales Gross Cost ofValue Margin Goods sold

Product A1: $120,000 $ 63,559 $ 56,441

Product B1: 346,500 183,527 162,973Product C1: 241,500 127,913 113,587

Total $708,000 $375,000 $333,000($1 rounding)

C G M i


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Step 3:

Deduct separable costs.

Cost of Separable Joint costsgoods sold costs allocated

Product A1: $ 56,441 $ 35,000 $ 21,441

Product B1: 162,973 46,500 116,473Product C1: 113,587 51,500 62,087

Total $333,000 $133,000 $200,000


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Approach 2: PhysicalMeasure Method Example

$200,000 joint cost

20,000

pounds A

48,000

pounds B

12,000

pounds C

Product A

$50,000

Product B

$120,000

Product C

$30,000


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Explain why the sales value at

splitoff method is preferred

when allocating joint costs.


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Choosing a Method

Why is the sales value at splitoff method widely used?

It measures the valueof the joint product

immediately.

It does not anticipatesubsequent management

decisions.

It uses a

meaningful basis.It is simple.


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Choosing a Method

The purpose of the joint-cost allocation is

important in choosing the allocation method.The physical-measure method is a more

appropriate method to use in rate regulation.


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Avoiding Joint Cost Allocation

Some companies refrain from allocating joint

costs and instead carry their inventories

at estimated net realizable value.


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Explain why joint costs

are irrelevant in a

sell-or-process-further decision.

I l f J i t C t


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Irrelevance of Joint Costsfor Decision Making

Assume that products A, B, and C can be sold

at the splitoff point or processed further

into A1, B1, and C1.Selling Selling Additional

Units price price costs

10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,500

11,500 C: $20 C1: $21 $51,500


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Irrelevance of Joint Costsfor Decision Making

Should A, B, or C be sold at the splitoff

point or processed further?

Product A: Incremental revenue $20,000 Incremental cost $35,000 = ($15,000)

Product B: Incremental revenue $31,500

Incremental cost $46,500 = ($15,000)

Product C: Incremental revenue $11,500

Incremental cost $51,500 = ($40,000)


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Account for byproducts

using two different methods.


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Accounting for Byproducts

Method A:

The production method recognizes byproductsat the time their production is completed.

Method B:

The sale method delays recognition ofbyproducts until the time of their sale.

f d


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Accounting for ByproductsExample

Main Products Byproducts

(Yards) (Yards)Production 1,000 400

Sales 800 300

Ending inventory 200 100

Sales price $13/yard $1.00/yard

No beginning finished goods inventory


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Accounting for ByproductsExample

Joint production costs for joint

(main) products and byproducts:Material $2,000

Manufacturing labor 3,000

Manufacturing overhead 4,000Total production cost $9,000


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Accounting for ByproductsMethod A

Method A: The production method

What is the value of ending inventoryof joint (main) products?

$9,000 total production cost

$400 net realizable value of the byproduct= $8,600 net production cost for the joint products


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200 1,000 $8,600 = $1,720 is the value

assigned to the 200 yards in ending inventory.What is the cost of goods sold?

Joint production costs $9,000

Less byproduct revenue 400Less main product inventory 1,720

Cost of goods sold $6,880


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Income Statement (Method A)

Revenues: (800 yards $13) $10,400Cost of goods sold 6,880

Gross margin $ 3,520

What is the gross margin percentage?$3,520 $10,400 = 33.85%


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What are the inventoriable costs?

Main product: 200 1,000 $8,600 = $1,720

Byproduct: 100 $1.00 = $100


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Journal Entries Method A

Work in Process 2,000

Accounts Payable 2,000To record direct materials purchased and used

in production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process


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Byproduct Inventory 400

Finished Goods 8,600Work in Process 9,000

To record cost of goods completed

Cost of Goods Sold 6,880Finished Goods 6,880

To record the cost of the main product sold


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Cash or Accounts Receivable 10,400

Revenues 10,400To record the sale of the main product


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Accounting for ByproductsMethod B

Method B: The sale method

What is the value of ending inventory of

joint (main) products?

200 1,000 $9,000 = $1,800

No value is assigned to the 400 yards ofbyproducts at the time of production.

The $300 resulting from the sale ofbyproducts is reported as revenues.


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Income Statement (Method B)

Revenues: Main product (800 $13) $10,400Byproducts sold 300

Total revenues $10,700

Cost of goods sold:

Joint production costs 9,000

Less main product inventory 1,800 $ 7,200

Gross margin $ 3,200

f


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What is the gross margin percentage?

$3,200 $10,700 = 29.91%

What are the inventoriable costs?

Main product: 200 1,000 $9,000 = $1,800

By-product: -0-


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Journal Entries Method B

Work in Process 2,000

Accounts Payable 2,000To record direct materials purchased and used

in production

Work in Process 7,000Various Accounts 7,000

To record conversion costs in the joint process


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Finished Goods 9,000

Work in Process 9,000To record cost of goods completed

Cost of Goods Sold 7,200

Finished Goods 7,200To record the cost of the main product sold


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Cash or Accounts Receivable 10,400

Revenues 10,400To record the sale of the main product

Cash or Accounts Receivable 300

Revenues 300To record the sale of the byproduct


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End of Course

Thank You

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Sesi 11 Joint Cost